The Many Facets of Sustainable Finance: Perspectives from France and Italy

“Sustainable” finance aims to leverage financial actors and resources to support sustainable and climate-friendly economic activities and projects. It looks beyond traditional financial criteria and frameworks, and channels financial resources towards projects focusing on the decarbonization of the economy and the “just transition” necessary to mitigate global warming and leave no one behind.

To achieve these objectives, the framework behind sustainable finance focuses on three considerations: environmental, social, and governance (ESG). Environmental considerations include, for example, measures related to environmental preservation and biodiversity, climate change mitigation and adaptation, pollution prevention, and the circular economy. Social considerations are related to inequality and inclusion, labor relations, investment in human capital, and human rights issues. Finally, the governance consideration focuses on power relations and transparency in decision-making. As the European Commission points out, governance “plays a key role in ensuring the inclusion of social and environmental considerations in decision-making” processes. Sustainable finance also includes the transparency of ESG risks that may impact the financial system. The European Union assumes that an appropriate governance of financial assets, stakeholders, and companies can mitigate these risks.

Different Countries, Different Priorities

Anywhere in the world, sustainable finance is becoming one of the most relevant tools to build resilience against climate change and other crises, such as COVID-19. For the European Commission, sustainable finance is essential to meet the European Green Deal’s objectives, make better use of available resources, be more resilient, and make the continent climate neutral by 2050. It is also one of the commitments of the Paris Agreement, a legally binding international treaty on climate change adopted in 2015 by 196 Parties, including the European Union and its Member States. Therefore, the European Commission has presented different programs to stimulate public and private investments and coordinate their efforts to meet these shared objectives. The most relevant are the Action Plan on Financing Sustainable Growth published in March 2018; and the EU Taxonomy, aiming to establish a list of environmentally sustainable economic activities (Regulation EU 2020/852), as part of the European Green Deal.

In France and Italy, sustainable finance is also becoming a structural trend in the banking and financial sectors. Central banks, such as Banca d’Italia in Italy and Banque de France in France, play a pivotal role in selecting measures that maximize the impact on citizens and businesses, particularly in the banking and financial sector.

In France, the Mont-de-Piété, a public pawnshop created in 1637, is considered the forefather of sustainable finance. But it was really from the adoption of the law on the social and solidarity economy (SSE) in 2014 and the Greenfin label, created by the State and dedicated to green growth (2015), that sustainable finance started to become mainstream. The objective of the 2014 law was to support and develop the economic sector that reconciles economic activity, social purpose, solidarity, and territorial development. Many tools have been developed, such as the Socially Responsible Investment label (SRI – 2016). According to Novethic, a research center, the market for sustainable funds in France represented, as of December 31, 2021, 896 billion euros in assets under management (+94% over one year), for 1186 funds. 749 of these funds had the SRI label.

However, it is only part of the picture: in France, the Sustainable Finance Observatory stresses the coexistence of four different sustainable finance practices: responsible investment (RI), green finance, solidarity finance, and social business:

• Responsible investment integrates ESG criteria into the investment and management processes. The most relevant label is the Socially Responsible Investment (SRI) label. It is supported by the public authorities and internationally recognized. It allows investors to promote the visibility of SRI management;
• Green finance includes all financial operations that promote the energy and ecological transition and the fight against climate change. Green bonds are loans to finance projects that contribute to the ecological transition, such as water, waste, and energy management.
• Solidarity finance is dedicated to investments oriented towards social criteria: integration activities linked to employment, social and housing issues, international solidarity, and the environment.
• Social business includes companies with a social purpose. Profits are reinvested in the fight against exclusion, environmental protection, development, and solidarity.

Italy distinguishes another aspect: “ethical” finance. According to its proponents, this type of finance carries values and objectives that go much further than “sustainable” finance. For example, it aims primarily to maximize the interests of people and the planet (not investors); support the real economy (not speculative instruments); better integrate corporate governance practices and social objects in the criteria of financial products (do not support, for instance, arm manufacturers); and is committed to achieving social transformation and social justice.

In Italy, since the end of the 1970s, ethical finance has developed according to the principles of using money as a means and not as an end, with the human person as a reference. The first ones were the MAG (Mutual Self-Management Societies), cooperative societies that collect savings and grant loans to their members. Then, in 1999, Banca Etica was born, a banking institution entirely dedicated to financing organizations whose activities are oriented towards the common good. The first legislative recognition of ethical finance dates to 2017, and a dedicated article in the finance law. Banca Etica is one of the fastest-growing ethical and sustainable banks in Europe: the amount of money it collects in the form of deposits has increased by an average of 16.32% per year over the last ten years, compared to 10.84% for other European ethical and sustainable banks. In absolute terms, deposits have increased by 453.47% between 2009 and 2019.

An Elusive Concept

However, long-standing structural barriers prevent sustainable finance from becoming the high road and meaningful investment from reaching the projects that need it most. Geopolitical conditions, the effects of climate change, the impact of COVID-19, and growing debt are dampening some investors’ appetites. Building on previous progress made by the G7 in 2021, the German G7 presidency outlined sustainable finance priorities for the finance ministers and central banks. This year, in 2022, the objective is to “ensure economic and financial stability and resilience against future crises, and shape the transformation processes in digitalization and climate neutrality.” Platforms such as the Glasgow Financial Alliance for Net Zero (GFANZ), gathering over 450 financial firms, all committed to reaching net-zero before 2050, has become the best place to establish a dialogue between policymakers, government leaders, public finance institutions, and other important stakeholders to meet these issues head-on at the international, national and project-specific level.

Besides, there are still no common international standards for assessing sustainability. As a result, different concepts and measures are used today to define “sustainable” business activity, pending regulation establishing uniform criteria for the data and methodologies used to construct ESG ratings. These criteria are still sometimes lacking in accountability and can lead to abuse. Pressure on regulatory authorities to overcome social and greenwashing is increasing, and worldwide they are launching investigations to understand whether financial institutions have exaggerated ESG claims.

The uproar is not limited to financial institutions: even the European Union is accused of institutional greenwashing. Indeed, at the end of December 2021, the European Commission presented a draft delegated act to include nuclear and fossil gas in its “taxonomy,” i.e., its list of economic activities that can be classified as “sustainable” investments. While the European Commission tried to explain that investments in gas and nuclear plants must meet “strict conditions” to earn the green label (e.g., by including emissions limits that could include gas plants with relatively-high CO2 emissions today if they plan to switch to low-carbon gas or reduce their running hours in later years), committees of the European Parliament rejected these measures. Eventually, the European Parliament voted in favour of the EC position, but the debate is likely to continue.

The Importance of Reliability and Trust

The challenge now is to agree on global principles and guidelines sustainable finance to ensure reliability and trust and unlock investment opportunities at the global scale. It would reassure investors and the financial sector and help mainstream “green” finance. The European Union has already taken another step forward by reaching an agreement on sustainability reporting, the Corporate Sustainability Reporting Directive (CSRD) on June 21, 2022. With this agreement, companies with more than 50,000 employees (and those with a net turnover of more than €150 million in the EU) will have to disclose detailed and comparable information on the reality of social and environmental commitments. However, to get to the next level, and make sustainable finance the norm and not the exception, public and private partnerships, industry-civil society dialogues, government guarantees, and the direct involvement of consumer organizations and major players in the sector, such as the heads of multinational banks, are avenues to consider.

The opinions expressed in this text are solely that of the author/s and do not necessarily reflect the views of hbs Tel Aviv and/or its partners.